When it comes to the baby-boom generation, it pays to be old.
The first of the boomers began reaching normal retirement age six years ago, and those who have already gone through the process probably are in better shape financially than their boomer brethren who will be retiring in the future.
In fact, it might seem as if the deck is stacked against younger boomers, who range in age from 53 to 62. For one, they are less likely to have a traditional pension than older boomers. If they are helping their children pay for college, they are facing far higher tuition costs than older boomers. And even after graduating from college, their children are more likely to need financial assistance than in the past. And then there are their parents. As people live longer, younger boomers are more likely to have to help support their parents in old age than boomers who came before them. One more bit of bad news: In their peak savings years, younger boomers are likely to see some of the lowest stock returns in decades. All of this is important information for financial advisers who will have to help young boomer clients overcome some or all of these obstacles as they enter their retirement years.
"My dad is on the very early edge of the baby boom, and I'm on the other edge," said Robert DeHollander, managing principal at DeHollander & Janse Financial Group. "I see some of those differences …Younger boomers, in a lot of cases, are dealing with aging parents and getting kids through college."
Younger boomers' biggest obstacle to a successful retirement might be that so few of them can look forward to a defined benefit pension. In 1975, 88% of all private-sector employees had a pension, according to the Center for Retirement Research at Boston College. That has since fallen to 33% today.
And that 33% figure is even worse than it seems, said Jack VanDerhei, research director at the Employee Benefit Research Institute. "Even if they did have a defined benefit plan at some point in their career, so many plans were frozen after 2006," when the Pension Protection Act took effect, he said. Many large companies still have pension plans, but for many workers, their pension benefits have been sharply curtailed.
"There are fewer boomers with pensions," said Steve Janachowski, CEO at Brouwer & Janachowski. "A lot of companies either went bankrupt or swapped them for 401(k) plans."
Younger boomers have also missed several benefits from Social Security that older members of the cohort have enjoyed. "For boomers born before Jan. 2, 1954, couples still have the ability to file a restricted application for Social Security benefits. Those born after that date do not, and that's a big difference," said Mark Smith, president at Vision Wealth Planning. A restricted application means that spouses can claim spousal Social Security benefits only, while allowing their own benefits to grow 8% a year until they hit age 70.
Some later boomers will also have to wait longer to get full Social Security benefits. Those born between 1946 and 1954 get full benefits at age 66. Those born in 1960 and later will have to wait until age 67 for full benefits.
For younger boomers, the decision about whether to pay for their children's college education is more difficult than for older boomers. Tuition, fees, and room and board for one year at a private nonprofit four-year institution was $29,530 in 1997, adjusted for inflation, according to the College Board. It's now $46,950.
"The cost of tuition has gotten more and more out of hand," said Bob Wander, principal at Wander Financial Services. "I met with clients last week, and they are secretly praying that their daughter only gets accepted at the state school where they live." The total cost of one year's tuition, fees, and room and board at a state school is $20,770 in 2017, according to the College Board, up from $11,860 in 1997.
Furthermore, many younger boomers are subsidizing their children's lives after college, Mr. Wander said. "Even though the job market has improved for young people, many are having trouble getting established in their careers," he said. Parents may carry their children on their health-care plans until they hit age 26, for example, and often help them with insurance after that.
Younger boomers also have to struggle with the cost of caring for their parents. "Parents are living longer … leaving younger boomers with increasing financial pressure," Mr. Smith said. A year in a private one-bedroom assisted facility is $45,000, up from $32,573 a decade ago, according to Genworth. A nursing home? That's $97,455 a year, up from $74,806 in 2007.
Finally, there's the matter of how the capital markets will treat younger boomers as they approach retirement. All forecasts, of course, need to be treated with a fairly large block of salt. Nevertheless, the consensus seems to be that, after an eight-year-long bull market in stocks and a 35-year bull market in bonds, returns going forward should be muted. Research Affiliates, for example, forecasts a 0.6% inflation-adjusted average annual return from the traditional balanced portfolio — 60% stocks and 40% bonds — for the next decade.
Vanguard has a similar outlook. "Even though we have the lowest expected returns on balanced portfolios in 10 years, it's not horrific, but clearly guarded," said Joe Davis, Vanguard's chief economist. "We said it last year and the year before — we expect returns to come down."
The conversation around retirement savings should be familiar to most advisers, but it will be crucial for those serving younger boomers. "We're in a real savings crisis in America," Mr. DeHollander said. "A recent survey of people right on the cusp of retirement showed that 40% had less than $10,000 saved." For those a decade younger who are expecting to retire at 65, reality could be a large shock.
Advisers will also have to have hard conversations about the cost of supporting adult children — both through college and afterwards. "It's not lecturing," said Marguerita Cheng, CEO of Blue Ocean Global Wealth. "It's getting them to think about, 'How long can I sustain this?' We have to make sure that they don't help their children to the point where it hurts their ability to save."
Another job is to point out options for younger boomers who want to help with college. "There are a lot of ways to pay for and to go to college," she said. "No one is going to show up to help parents pay for retirement."
Finally, advisers working with the very end of the baby boom generation — and the Gen Xers who will follow — should be making them aware of some of the dangers that are no longer comfortably far off in the future. The Social Security trust fund, for example, is projected to run out of funds in 2035. Medicare's Hospital Insurance Trust fund is projected to be exhausted by 2029 — the year the youngest boomers hit 65.
"Whatever the magic year is for the Social Security trust fund to go to zero, it's one thing to take a 25% cut in Social Security benefits," Mr. VanDerhei said. "My bigger fear is that there's no telling what is going to happen with Medicare, and problems with that could come far earlier. You could have more cost-sharing provisions, higher premiums — and that will make it much more difficult in retirement, regardless of the financial resources you've accumulated."